Regional Economic Struggle Deepens
According to a World Bank (WB) report, global growth in 2013 will remain sluggish as economic recovery in the developed nations is likely to be slow. Lower business and consumer confidence, government spending cuts, as well as high rates of unemployment may delay the recovery, the report says. The report has also noted that developing nations may experience slower growth due to structural and monetary policy challenges.
Despite political unrest and the delay in its transition to democracy, the Middle-East and North Africa (MENA) region has been attracting foreign direct investments (FDI) over the past year, according to Nuqudy.com. Yet, fiscal challenges in some parts of the region, notably Egypt, have intensified.
Among other key MENA economies, Jordan has been hurt by political unrest in neighboring Syria. The steady flow of Syrian refugees has taken a toll on its limited resources. Morocco, though, appears positive about its growth this year on expectations of a relatively better agricultural output. Despite a growth slowdown, Israel’s economic prospects appear to have improved due to the commencement of natural gas production from its newly discovered Tamar field during the quarter. In the Sub-Saharan region, South Africa has been hobbled by continuous labor unrest.
An International Monetary Fund (IMF) report has emphasized that in view of the slow recovery in the broader global economy, developing countries in the region must focus on structural reforms and investments to sustain growth.
SOUTH AFRICA: LABOR UNREST, FALLING RAND, AND HIGH UNEMPLOYMENT ADD TO FINANCIAL DISTRESS
South Africa’s economic challenges have intensified with falling tax revenues, a widening budget deficit, and high debt levels. To add to problems, its key mining sector has been hurt by persistent production disruptions due to workers striking for higher wages. The labor unrest has not just pushed up costs within the mining sector but has also taken a toll on investments in South Africa. Investors are also worried about the falling value of the South African rand, which, if unchecked, may increase inflationary pressures, Bloomberg has reported.
What’s worse, the exceptionally high unemployment rate, particularly among the youth, has hurt consumer spending. According to Reuters, the continuous decline in retail sales growth since last year mirrors the fall in private consumption. Elsewhere, the South African Reserve Bank (SARB) has held its repo rate steady since July last year, as inflation has stayed close to the central bank’s target ceiling of 6 percent, Dow Jones has reported.
In an effort to reduce the fiscal deficit, South Africa’s finance minister announced spending cuts in his latest budget review for 2013. He also mentioned the possibility of tax hikes and the sale of state-owned assets if the decline in tax revenues and weak economic growth continued. On a positive note though, the government and some state-owned enterprises have invested substantially in infrastructure projects, which are expected to fuel growth in the coming quarters.
In addition to fiscal challenges, South Africa is experiencing weaker demand for its goods from key trade partners in Europe. The finance minister has reduced South Africa’s GDP growth outlook for 2013 to 2.7 percent from an earlier estimate of 3 percent.
ISRAEL: OUTLOOK IMPROVES ON GAS OUTPUT FROM TAMAR FIELD
Despite subdued GDP growth, Israel’s outlook for 2013 improved during the first quarter following the commencement of natural gas production at its Tamar field off the coast of Haifa, which was discovered in 2009. In addition to boosting the GDP, the gas output from Tamar is expected to drastically bring down the country’s energy expenses. Elsewhere, housing prices remained in an uptrend despite the restrictions levied on the mortgage market. Therefore, keeping aside the need to boost growth through interest-rate cuts, the central bank of Israel left its short-term interest rates unchanged in March, for the third month in a row, in order to avoid a housing price bubble.
Israel’s growing budget deficit remained a concern during the first quarter. While a new budget is yet to be formulated after the elections in January, the government is considering deep spending cuts and tax hikes to bridge the gap between its revenues and expenses. As an Israeli daily has pointed out, a continued rise in the fiscal deficit may lead to higher interest rates, which in turn may strengthen the shekel and hurt the prospects of Israeli exporters.
On the positive side, Bank Hapoalim’s Purchasing Managers Index (PMI) rose for the fourth month in a row in March, indicating steady improvement in the manufacturing sector. The PMI news release said increases in private consumption and new industrial export orders contributed to robust manufacturing activity. Also, the consumer confidence index (CCI) remained stable, signaling better prospects for the economy. The Bank of Israel expects a GDP growth of 3.8 percent this year.
EGYPT: IMF LOAN DEAL EXPECTED TO PROP UP STRUGGLING ECONOMY
Egypt’s transition to democracy since its uprising in 2011 continues to be chaotic due to the prolonged friction between the ruling Muslim Brotherhood party and opposition parties. Meanwhile, the economy has been struggling due to deteriorating foreign currency reserves, weakness in the crucial tourism sector, which is not just a key driver of economic activity but also a major source of foreign exchange, and a widening budget deficit.
Adding to woes, the persistently weakening Egyptian currency is driving up the cost of imports and stoking inflationary pressures. Rising unemployment too is not making it any better for the Egyptian economy. Another factor gnawing at Egypt’s public finances is its expensive subsidy system, which has deepened the fiscal deficit. In a bid to rein in the growing deficit, the government recently raised the prices of electricity and cooking gas cylinders, having already reduced subsidies on fuel and hiked fuel prices once earlier this year.
According to Reuters, dwindling foreign exchange reserves are currently a serious threat to Egypt’s ability to import food and fuel. Elsewhere, there was a fall in Suez Canal revenues which are a vital source of foreign currency alongside tourism and remittances. Given this economic stress, a deal with the IMF for a loan of $4.8 billion, which is yet to be sealed, is expected to alleviate Egypt’s funding crisis and maintain social stability.
MOROCCO: CENTRAL BANK PROJECTS 4 percent-5 percent GROWTH IN 2013
Morocco ended 2012 on a rather subdued note, with the Euro-zone crisis and a drought at home hampering economic growth. However, according to a Moroccan daily, growth is expected to pick up in 2013 on the strength of better agricultural production, an uptick in tourism, and ongoing fiscal reforms. Agriculture is a vital cog in the wheel of the Moroccan economy and through its agricultural growth strategy — “Plan MarocVert”— the country aims to modernize the sector and improve opportunities for both small- and large-scale farmers.
Last year, tourism, which is a key source of revenue and foreign currency, bore the brunt of the global economic slowdown and troubles in Europe, Morocco’s chief economic partner. However, the Maghreb Daily has reported that several tourism-related investments are in the pipeline, which augurs well for this sector in 2013. What’s more, according to an African daily, Morocco is turning out to be one of Africa’s most favored destinations for foreign direct investments, alongside Kenya and South Africa. The daily said new projects in the Kingdom have surged 40 percent.
Still, Morocco’s budget deficit remains a concern. Although the clamor to bridge the fiscal gap is getting louder, public finances are expected to stay under pressure due to continued government spending on energy and subsidies, Bloomberg has reported. Additionally, the European financial crisis has dented Morocco’s export market and widened the trade deficit. On a more optimistic note though, the central bank has continued to hold its interest rates steady at 3 percent since March 2012, as inflation remains subdued following slower growth in food prices. Moreover, the central bank has said that it does not expect any external inflationary pressure, given the weak global economic activity. According to the central bank, Morocco’s GDP is expected to grow 4 percent-5 percent this year, gaining mainly from higher agricultural activity.
JORDAN: HIGH YOUTH UNEMPLOYMENT, SYRIAN REFUGEES ARE KEY CONCERNS
Over the past two years, Jordan has been adversely affected by the political upheavals in Egypt and Syria. Known to import 95 percent of its energy requirements, Jordan saw its energy problems deepening during Egypt’s uprising, when its gas supplies from that country were cutoff. Jordan’s Department of Statistics (DoS) has said that buying fuel from elsewhere not only inflated the country’s import bills but also led to a surge in public debt. And now, the middle-eastern economy has been struggling to cope with the cost of hosting Syrian refugees. Further, according to the DoS, a drop in the receipt of foreign aid and grants, which typically help governments bridge current account and budget deficits, have added to the country’s woes.
On another discouraging note, Jordan has lately been witnessing protests against the government’s decision to cancel fuel subsidies and pass on the additional costs of fuel and electricity to consumers. There are concerns that rising prices and lower subsidies may push inflation higher. What’s worse, the Hashemite Kingdom’s unemployment rate remains stubbornly high, particularly among its youth.
Nevertheless, one bright spot in the economy is that tourism-related revenues and remittances from Jordanians living abroad have showed signs of improving, according to the central bank of Jordan. Still, a Jordanian daily has pointed out that water scarcity and the government’s decision to introduce high accommodation taxes on hotels may affect the tourism sector’s growth potential. The influx of refugees from Syria and other neighbors has strained Jordan’s already scant water resources.
On the political front, King Abdullah II swore in a new Cabinet during the first quarter. For the first time in Jordan’s history, the Cabinet is headed by a prime minister elected by the Jordanian parliament. The elections, which were held in January, and the Jordanian parliament’s new powers to elect a premier are a part of the King’s political reform program. The IMF has projected a GDP growth of 3.5 percent for the kingdom in 2013.
FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
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